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05/01/2014

Will 2014 Be a Tipping Point for Logistics?

The Atlanta Fed’s Trade and Transportation Advisory Council convened in early April in Jacksonville, Florida. Overall, the tone was encouraging compared with last year’s September meeting, when members reported decelerating activity during the summer. This time, a majority reported expanding activity during the fourth quarter and into 2014, despite the impact of unseasonably harsh winter weather. Additionally, the expectation for demand over the short term is for continued growth at a slightly higher pace.

District port contacts were upbeat, citing a rise in energy exports, steel imports, and higher container volumes. Trucking companies reported very strong freight volumes, which appears to them as real demand and not just a rebound from severe winter weather. It is important to note that the industry continues to operate with about 20 percent less capacity than prerecession levels, and capacity constraints are beginning to limit the movement of goods on highways.

Similar to past years, the railroad industry continues to see modest gains in intermodal traffic and shipments of grain and industrial equipment. Construction products were down slightly, along with significant declines in export coal. In air cargo, revenues are reportedly back to 2007 levels, albeit with only slightly higher air freight volumes boosted by international activity and sharp declines in domestic cargo.

Employment and pricing
Council members indicated employment levels remained stable, with no anticipated increase in staffing levels over the short term. In trucking, struggles to find drivers continue, and regulations have eliminated between 2 percent and 4 percent of drivers and have also reduced the number of hours and miles allowed for drivers. Hiring diesel mechanics has also become a challenge.

Besides the trucking industry, which has steadily been increasing driver pay, council members generally reported no significant upward pressure on labor costs, outside of cost increases for health insurance. As a result of capacity constraints, however, trucking companies project carrier rate increases of between 4 percent and 6 percent, on average, in both the near and longer term as supply and demand dictate. These capacity constraints are creating opportunities for rail carriers, who are seeing more pricing power as well.

International trade
In terms of growth rates of the value of air cargo, regions that should drive demand for U.S. exports include the Middle East, driven by Gulf countries, the United Arab Emirates, Saudi Arabia, and Israel; Asia (specifically China, Hong Kong, and Singapore); Europe, concentrated in areas in Western and Eastern Europe recovering from or not affected by euro zone issues; and Latin America and the Caribbean (and mostly Brazil). Air trade activity should remain flat.

District ports expect cargo volumes in 2014 to grow by up to 5 percent with strong increases in imports while exports will grow more slowly. Asia will remain a primary market for food exports from the United States, and some regions of Africa (chiefly in the western and southern areas) will be target markets for U.S. exporters as the demand for oil, gas, and food products increases.

Geopolitical concerns present potential downside risks for trade flows, and labor issues at West Coast ports could interrupt trans-Pacific trade. Congested and outdated highways, combined with a shortage of truckers, will eventually hamper the inland movement of goods. For example, the lack of funding for dredging or for antiquated lock systems at District inland ports and seaports could stunt growth.

In the near future
Overall, our Trade and Transportation Advisory Council members were upbeat and see two related tipping points approaching. First, prices are on the verge of increasing more rapidly as businesses are forced to pay more as freight charges, especially for trucking and rail, increase. Second, capacity constraints might suppress growth as demand-side bottlenecks in the movement of goods become more frequent.

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01/06/2012

More on the Sixth District's exposure to Europe

Europe remains in the news as 2012 begins. Developments there continue to influence global financial markets and might be pushing the euro area's economy into recession. Many forecasters have identified contagion from the European financial crisis and recession as a significant risk to U.S. economic growth in 2012.

"My baseline forecast for 2012 builds on the picture I've just painted of the second half of 2011. I'm expecting continued moderate growth, decently behaved inflation, continuing net job creation, but slow progress on unemployment. You will note I used the word ‘baseline.' I need to emphasize that at this juncture I perceive considerable downside risk to this baseline forecast. The most prominent source of risk is Europe. "

Steven B. Kamin, the director of the Division of International Finance at the Federal Reserve's Board of Governors, discussed the economic situation in Europe and its impact on the U.S. economy in testimony before the U.S. House of Representatives on December 16, 2011:

"Here at home, the financial stresses in Europe are undoubtedly spilling over to the United States by restraining our exports, helping to push down business and consumer confidence, and adding to pressures on U.S. financial markets and institutions."

A few weeks ago, SouthPoint looked at trade connections between Europe and the Southeast, noting that

"While there is concern about the financial impact of instability in Europe, a souring of economic activity across the Atlantic would also affect international trade. In either case, the region is not immune."

We thought we'd dig a little deeper into the issue and look more closely at which parts of the Southeast economy are vulnerable to the crisis in Europe.

Clearly, U.S. companies that depend on sales of their products to the euro area are likely to see the weakening of demand for their Europe-bound products as the euro area's economy contracts and if the euro continues to depreciate. According to the U.S. International Trade Administration, the exposure of Southeast's exporters—as measured by the share of goods sold in the euro area as percent of total goods exports—is relatively low, but the share varies significantly across the Southeast states.

Alabama's exporters appear to be the most vulnerable to changes in European demand—almost a fifth of the state's merchandise exports are shipped to the euro area. About half of those exports are sold in Germany, mainly autos. The good news is that Germany seems to be one of the more resilient European economies, along with the Netherlands, Belgium, and France—the other large euro area markets for Southeast's exporters. The economically weakest countries in the euro area—Greece, Ireland, and Portugal—account for a small fraction of the region's exports.

While Florida's exporters appear to be least exposed to the euro area compared to other states in the Southeast (most of Florida's exported goods go to Latin America), the state's large tourism industry may feel some impact if a recession and a weakening euro keep Europeans from traveling to the United States. Based on data from the Office of Travel and Tourism Industries and VISIT FLORIDA, an estimated 1.2 million residents of the euro area visited Florida in 2010. Fortunately, this number represents less than 2 percent of all the visitors to the state.

Another important part of Florida's economy that to some extent depends on European spending is residential real estate. In Florida, sales to nonresident foreigners account for about 25 percent of total residential sales (compared with only 3 percent nationally). For the state as a whole, Western Europeans (excluding U.K. residents) account for about 11 percent of all nonresident foreign buyers. While the number is relatively low, some parts of the state are much more dependent on Europeans. For example, in the Miami-Fort Lauderdale-Miami Beach market residents of Germany accounted for nearly a quarter of all nonresident foreign buyers in the 12 months ending in June 2011, according to the National Association of Realtors.

In general, whether through exports, tourism or real estate, the Sixth District's exposure to Europe appears relatively small. The bigger concerns are the possibilities of severe financial contagion (via the banking system and financial markets) and a hit to business and consumer confidence, which apply as much to the District as to the nation overall.

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